Coloplast As Sp/Adr

Ladies and gentlemen, welcome to the Coloplast AS Q1 2024-25 Earnings Release Conference Call. I'm Valentina, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing SA and 1 on your telephone. For operator assistance, please press SA and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Willemsen, President and CEO. Please go ahead.

Good morning and welcome to our Q1 2425 conference call. I'm Christian Willemsen, the CEO of Coloplast, and I'm joined by our CFO, Anas Laninskoglu, and our investor relations team. We'll start with a short presentation by Anderson, myself, and then open up for questions as we usually do. Please turn to slide number three. We delivered 8% organic growth and a reported EBIT margin before special items of 27%, which was in line with our expectations. Adjusted return on invested capital after tax and before special items was 15% on par with last year. Let me start today's call with a few highlights. On the 14th of November, 2024, the final local coverage determination policy for skin substitutes was announced. Kerasys was one of the few products that was added back to the final list of covered products as a result of the strong clinical evidence backing the efficacy of the Fishkin technology. Following a freeze of all regulatory guidance not yet in effect by the new U.S. administration, the implementation date of the final LCD policy has been moved by two months to the 13th of April, 2025. CareAssist's products are currently covered and will remain covered once the final LCD policy is implemented, and as such, this updated implementation timeline is not expected to impact current trading. Next, in December 2024, we announced the divestment of our skincare business. The divestment is a key initiative from the Simplicity and Profitability Improvement Program for our advanced wound care business area, which will result in a positive impact on the group EBIT margin of around 30 basis points this financial year. The divestment will reduce reported revenue for 24-25 with around 350 million Danish kroner or around 1.5 percentage points impact on reported revenue growth. Now, let's look at a few performance highlights from Q1. Our chronic care business is off to a good start with both ostomy care and continence care outgrowing the market. Incontinence Care Q1 marked the first quarter in which Luja was the main contributor to growth driven by the male catheter. We continue to receive strong feedback on Luja and its micro-hole zone technology from both users and healthcare professionals. We also continue the rollout of the female version of the catheter now available in nine markets with the U.S. as the latest launch market. Our two newest additions to the portfolio, Atos Medical and Kerasys, are also off to a good start with continued strong momentum and double-digit growth in the quarter. Finally, Q1 also marked a soft start in our interventional urology business in our emerging markets region. And interventional urology growth in the quarter was impacted by a voluntary product recall related to packaging initiated in December 2024. The issue with the packaging has been resolved, and we will resume sales of the affected products here in February. The emerging markets growth was impacted by a high baseline last year But despite the softer start, I expect an improvement in both businesses during the year. Now, let's look at today's results in more detail. Could I ask you to please turn to slide number four? In Honest to Me Care, both organic growth and growth in Danish Kroner were 7% in the first quarter. The Sensora Mio portfolio was the main growth contributor in Q1. Our latest addition to the ostomy care portfolio, Censura Mu in black, is off to a good start in the 12 markets where the range has been launched. Bravo range of supporting products also made a solid contribution to growth while our Censura and Asura alternative portfolios continue to drive growth in emerging markets. From a geographical perspective, growth in Q1 was driven by solid contributions from Europe and the U.S. The emerging markets region was impacted by a high baseline last year, as mentioned earlier, and delivered a softer Q1. The U.S. posted double-digit growth in the quarter, which includes solid underlying demand and also some benefit from a lower baseline last year. In continence care, both organic growth and growth in Danish Kona were 7% for Q1. The Lugia portfolio was the main growth contributor in the quarter, driven by the male catheter in the U.K. and Germany. The speedy cath and admittance catheters also contributed to growth in the quarter. Our two smallest segments in continence care, bowel care and collecting devices, both contributed to growth in Q1. From a geographical perspective, growth was driven by Europe and the U.S., while growth in emerging markets was impacted by a high baseline, as mentioned previously. Voice and respiratory care posted 11% growth for Q1, with growth in Danish corona of 10%. Strong performance in voice and respiratory care continues to be driven by broad-based contributions from both laryngectomy and tracheostomy, both of which grew at a double-digit rate in Q1. In laryngectomy, growth was driven by an increase in the number of patients served in existing and new markets, as well as an increase in patient value driven by the ProvoxLife portfolio. A recent example of how we continue to develop the laryngectomy market comes from France, where reimbursement for heat and moisture exchangers was expanded from one HME per day to multiple HMEs per day, allowing users better choice and better situational use of the products. Growth in tracheostomy in the quarter was driven by continued solid demand and an increase in the number of patients served. From a geographical perspective, all regions contributed to growth, led by Europe and the U.S. In advanced wound care, organic growth was 12% for Q1 and growth in Danish corona was 7%. Reported growth includes four percentage points negative impact from the divestment of the skincare business reflecting one month of impact. Kerasys was the main growth contributor in advanced wound care with continued solid momentum and growth of 32% in Q1. Growth was broad-based with contributions from both the inpatient and outpatient segments. Kerasys' operating profit margin excluding PPA amortization was 12% in the quarter in line with expectations. The advanced wound dressings business grew 6% in Q1. From a product perspective, biotin fiber was the main growth contributor, followed by biotin silicone. In October 2024, our dressing portfolio was strengthened with the launch of biotin superabsorber, a soft and non-adhesive dressing for the treatment of wounds with high volumes of exudate. The product has been launched in key European markets with very positive feedback. In interventional urology, both organic growth and growth in Danish Kona were 1%. As mentioned earlier, growth in the quarter includes negative impact from the voluntary product recall in bladder health and surgery of around 25 million Danish Kona. We expect continued negative impact from the product recall in the second quarter of around 15 million Danish Kona, and as I mentioned earlier, sales of the effective products will resume here in early February. We expect to recover the majority of the lost revenues in the second half of the year as we continue to see unmet demand in the market for the effective products. The negative impact from the product recall was partly offset by a solid quarter in the endourology business driven by our laser equipment, the sodium fiber laser drive, and the men's health business in the U.S. also contributed to growth, while the women's health business had a neutral impact on growth. From a geographical perspective, the U.S. was the main growth contributor in Q1, while Europe detracted from growth due to the product recall. With this, I'll now hand over to Anders, who will take you through the financials and outlook in more detail. Please turn to slide number five.

Thank you, Christian, and good morning, everyone. Reporter revenue for Q1 increased by 420 million Danish kroner, or 6%, compared to last year. Organic growth contributed around 500 million Danish kroner, or around 8%, to reported revenue. Revenue from divested operations, mostly related to the divestment of the skincare business in December 24, reduced reported revenue by 47 million Danish kroner, or around 1%. Front exchange rates reduced reported revenue by 32 million Danish kroner, or around 1%, mostly related to the depreciation of a basket of emerging market currencies, such as the Argentinian peso, the Brazilian real against the Danish kroner, as well as the Japanese yen against the Danish kroner. This negative impact was only partly offset by the appreciation of the British pound against the Danish kroner. Please turn to slide number 6. Gross profit for Q1 amounted to 4.8 billion Danish kroner, corresponding to a gross margin of 68% on par with last year. The gross margin was positively impacted by a favourable development in input cost, price increases, and country and product mix. The positive development in the above-mentioned factors was partly offset by ramp-up costs of our manufacturing sites in Costa Rica and Portugal. The gross margin also included negative impact from currencies of around 40 basis points. Operating expenses for Q1 amounted to around 2.8 billion Danish kroner, increasing by 6% compared to last year. The distribution to sales ratio for Q1 was 33% compared to 32% in Q1 last year. The increase in distribution cost was driven by continued commercial investments in kerosene and higher sales activities across markets. The distribution cost also included around 20 million Danish kroner, extraordinary cost related to the new distribution center in the US. The admin to sales ratio for Q1 was 4% compared to 5% last year, primarily impacted by high baseline as well as benefits from synergies from the AdSense Medical integration. The R&D to sales ratio for Q1 was 3% of sales compared to 4% last year. Overall, this resulted in an operating profit before special items of 1.9 billion Danish kroner in Q1 and a 5% increase compared to last year. The EBIT margin before special items for Q1 was 27% compared to 28% last year. The EBIT margin continues to include negative impact of around 100 basis points from currencies, including PPA amortization costs. Currencies also had a negative impact on the reported EBIT margin of around 40 basis points, most related to the depreciation of a basket of emerging market currencies, as well as Japanese yen against the Danish kroner. Financial items in Q1 were a net expense of 69 million Danish kroner compared to a net expense of 253 million Danish kroner in Q1 last year, driven mostly by interest expenses related to the financing of the ASOS medical acquisition. The finance expenses were partly offset by gains on balance sheet items against the loss on balance sheet items last year. The ordinary tax expense in Q1 was 342 million Danish kroner with an ordinary tax rate of 22%, on par with last year. However, the total tax expense and the effective tax rate were impacted by an extraordinary tax expense of 336 million Danish kroner related to the transfer of Chaos' intellectual property from Iceland to Denmark. As a result of the extraordinary tax expense, the effective tax rate in Q1 amounted to 41%. The Kerasys IP transfer is made to ensure consistency with our tax model and will help us maintain simplicity in our infrastructure as we initiate the integration of Kerasys. The IP transfer will have a similar quarterly impact on the tax expenses for the rest of this financial year. As a result of the IP transfer, an extraordinary tax payment impacting cash flows will be made in Iceland from 26-27 at the earliest. The payment in Iceland will be fully offset by reduced tax payments in Denmark for a period of around 7 years, starting from 2024-2025. Adjusted for the kerosene IP transfer, net profit before special items in Q1 was 1.4 billion Danish kroner, or a 17% increase compared to last year. Adjusted diluted earnings per share before special items also increased by 17% to 6.38 Danish kroner. Please turn to slide number seven. Operating cash flow for Q1 was an inflow of 2 billion Danish kroner compared to an inflow of 1.8 billion Danish kroner in Q1 last year. The development in cash flows was mostly driven by positive development in changes in working capital, driven by trade receivables and inventories, partly offset by an increase in interest payments. Cash flow from investing activities was an outflow of 133 million Danish kroner compared to an outflow of 267 million Danish kroner last year. The development in cash flow from investing activities in Q1 includes positive impact of 192 million Danish kroner from the divestment of the skincare business. CapEx in Q1 amounted to 308 million Danish kroner with a CapEx to sales ratio of 4% on par with last year. As a result, the free cash flow for Q1 was an inflow of 1.9 billion Danish kroner compared to an inflow of 1.5 billion Danish kroner last year. Excluding the positive impact from the skin care divestment, the adjusted free cash flow was an inflow of 1.7 billion Danish kroner or an 11% increase from Q1 last year. The trading 12-month cash conversion was 85%. and net working capital amounted to around 25% of sales on power last year. Now let's look at the guidance for 24-25 financial year. Please turn to slide number eight. For the 24-25 financial year, we continue to expect organic revenue growth of 8% to 9% and an EBIT margin before special items of around 28%. The assumptions on both organic growth and the EBIT margin before special items outlined in November still largely hold. Reported revenue growth in Danish kroner is now expected to be around 7%, which includes around 1.5 percentage points impact from the skincare divestment and a neutral impact from currencies. On organic revenue growth, guidance assumes continued good momentum and stable supply and distribution of products across the company. A key development since November is the product recall in interventional urology, which creates a higher level of uncertainty, but as mentioned earlier, we are optimistic that we can recover majority of the lost sales in the second half of the year. On Kerasys, we continue to expect contribution of around one percentage point to our group organic growth, and the updated timeline for implementation of the final LCD does not change our expectations. On EBIT margin before special items, we continue to expect benefit from low inflationary pressure across cost categories and benefit from the profitability improvement initiatives in advanced wound care of around 30 basis points, mostly related to the skin care divestment. We are also starting to see a gradual improvement in the extraordinary cost related to the establishment of the U.S. distribution center, and we are on track to reach a normalized cost level at the end of Q2. For kerosene, we continue to expect a year with improved profitability. However, the impact for the group is still expected to remain at around minus 100 basis points. Finally, currencies are expected to have a limited positive impact on the EBIT margin with improvement expected as of Q2. In terms of phasing, we expect both organic growth and the EBIT margin to be second half weighted. For 2024-2025, I continue to expect around 130 million Danish kroner in special items. The net financial expenses for 2024-2025 are still expected at around minus 750 million Danish kroner, mostly related to interest expenses from the financing of Atos Medical Acquisition. Our ordinary tax rate for 2024-2025 is still expected to be around 22%. However, as a result of the Kairos' IP transfer from Iceland to Denmark, the effective tax rate is expected to be around 40% for the year. Our long-term expectations for tax rate of around 22 or 23% are unchanged. Capacity is still expected to be around 1.4 billion Danish kroner and includes investments related to the establishment of new manufacturing site in Portugal. On networking capital, I still expect the networking capital to sales ratio in 2024-2025 in line with our long-term expectations of around 24%. Finally, before we move to Q&As, I would like to mention that we will host a Capital Markets Day in Denmark on the 2nd of September 2025, where we will present our new 5-year strategy to the market. We will share further details about the event in due time. We look forward to seeing many of you in person in September. So thank you very much. Operator, we are now ready to take questions.